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Corporate Tax Exemptions: An Overview

Sonal Pruthi

| Updated: Dec 12, 2020 | Category: Taxation

Corporate Tax Exemptions

A tax levied on its net income or profits earned through its business is known as Corporate Tax. The tax which is paid by public and private companies registered under the Companies Act 2013. The company has to pay tax at the prescribed rates as given under the Income Tax Act 1961[1].

Corporate Entities Liable To Pay Tax in India

  1. Incorporated Corporations in India
  2. Corporations acquire revenue from India and doing business in India
  3. Foreign Companies resident in India for the purpose of tax
  4. Foreign companies that are permanently established in India

Tax Rates Applicable On Corporates

Tax Rates Applicable On Corporates

Current Amendments From The Year 2019

  1. Domestic Corporate Tax  To-25.17% inclusive of all surcharges and cess
  2. Gross Turnover Of The Companies  Which is 250 CRORES OR MORE, a flat tax rate has been made -22% changed from 30%/25%
  3. Mat Changed From 18.5 %TO 15%
  4. New Manufacturing Units From 1/9/2019 TILL 31/3/2023- 15%

What Happens When Tax Befits Are Given To Corporates

A Comparative Analysis

  1. Canada Model –

Canada Policy on Corporate taxes:

Canada from 2000 to 2015 combined with federal and provincial corporate tax has been reduced from 42.4% to 26.3%.

  • The idea was to increase the economic activity, which is possible by getting investment from foreign lands. The need was to make the economic landscape more popular for investment. It leads to increase in the after tax rate of return on investment; this increased return improves the rate of investment from the investors.
  • When the investment by business is more in the machinery, technology, and goods, workers have more capital to work and produce more and higher valued output for each hour they work and making them more productive.
  • Increased productivity results in higher wages to workers and products in boosting of economy.
  • It creates more jobs and increases employment rates in the economy.

Reports by OECD for Canada

As a study conducted by the OECD concluded that the economic growth is directly proportional to the taxes charged , a survey conducted for 21 developed countries from 1971 to 2004 Taxes such as tax on income ( personal income), goods ( consumption), and property taxes gives had adverse effects. The effect is seen on the person’s income, where corporate income taxes are the largest contributors..

World Bank Reports

As per the report of the former World Bank Chief Economist Simeon Djankov, on the analysis of the data revealed by countries from 85 countries, it was concluded that higher the corporate taxes will lead to less economic growth and gives negative economic effects on reducing investment and entrepreneurial activity.

2. USA-

USA Model on Corporate Tax

USA has enacted the legislation Tax Cuts and Jobs Act. The Act amended the important legislation point that Federal Corporate Income Tax was slashed from straight 35% to 21%. Slashing Combined rate from 38.9% to 25.7%. The Corporate tax was made compatible with the OECD Principles.

Post Tax Reform it is made average with the OECD Principles and earlier, it was highest considering the US Combined Corporate Tax.

Need:

  1. The idea was to stop the companies from shifting to lower tax jurisdictions.
  2. It will increase the size of stock, increase production, output; employment will grow, favourable for the foreign investors.
  3. It will create an economy 1.7 times larger economy from its present status.

Reason Why USA Choose To Reduce Taxes;

  • The increased tax rates have led to the shrinkage the total economy by 0.87% or 228 Trillion . this will reduce the Capital stock by 2.11%, wages by 0.74%.
  • Another main cause is, rising uncompetitiveness of the USA economy due to cost recovery, worlwid3e application, and high statutory rate.
  • The legislation was made effective from 2017.

As Per Neo Classical Economic Principle-

  1. The reason for any economy to grow is dependent on its people who are willing to work.

Example-

This can be understood as that the higher taxes for the company will make him less profitable and will employ lesser people for the employment, the company will always look for the destination or jurisdiction which has lower tax rates, the company will move but the workers may or may not move. The company will find a suitable location according to the needs but it is difficult for the worker to move and get a lower tax bill. It means capital is responsive to tax changes. Lower corporate tax means less economic harm.

2. The corporate tax is borne by Corporate.

Example-

It can be easily seen that the tax is always split between the lower-income wage workers and owners of company.

How Lower Corporate Taxes Increases Wages :

How Lower Corporate Taxes Increases Wages

India

After the turn and twist in the economy due to demonetization and GST , the Government in 2020 has planned the proposal to give certain tax benefits to the Corporates:

  1. 10 Year full tax exemption to companies making investment above 500 million dollars
  2. Four  year tax holiday to companies that invest more than 100 Million dollars
  3. 100 million investments by the companies who are labour-intensive sectors such as textiles, food processing, labour and footwear.
  4. A 10% lower corporate tax rate for another four years is proposed.

Conclusion


It can be concluded by referring to the proposal which has been brought by the government in 2020 after the pandemic has hit the India. These reforms as mentioned above should have been brought much before.

An act like Tax Cuts and Jobs Act should be implemented which caters explicitly the needs of the reduction in its corporate tax. The act is true need for India where the lower corporate tax rates would bring investment and easy legislation and procedure attracts the investors. So the economy growth is in the direct relationship with the Taxes like Corporate Tax and attaching benefits to it bringing directly economic development to the country.

Read our article:Old vs. New Tax Rates – Whether a taxpayer should choose the new tax regime for FY 2020-21?

Sonal Pruthi

She is B.Com (H), LL.B LLM, Cs (Module 2) And Certification In Cyber Law From ILI Qualified. She has Been A Legal Teacher In The Previous Organization. My Strength Is My Expertise Knowledge In Civil Laws, Corporate Law And Tax Laws. I Have Been Legal Teacher And Legal Trainer In The Past Organization. Her Knowledge About The Subjects Have Expanded Due To Teaching Number Students From Various Universities All Over India.

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